first majestic silver

Gold Market and Precious Metals Commentary

January 20, 1999


We are pleased to say that we have raised to the level of awareness about the "Goon Squad" and their activities. Queries have come back to us from everywhere: "Could Goldman Sachs ( Secretary of the Treasury, Rubin's, former firm ) really be a part of a cabal that has been holding down the gold price?"

We will continue to sound off that we believe that this has been just such the case. We will do so as we try to "turn up the heat" on the interlopers that have created havoc for those in the gold industry. We also believe this "Goon Squad", and their cronies that has been led by Goldman Sachs, have muscled all their forces to knock the price of gold down one more time, so that they, and their fellow bullion dealer shorts, can begin to cover their massive gold short positions from strength, and not cover because they are forced to buy in a panic.

When Le Metropole opened its Café doors last Labor Day Weekend, the price of gold was below $280 and the price of silver was $4.83. We were very bullish at the time and were calling for bull market moves. Midas commentary recruited David Niven, Anthony Quinn, Gregory Peck and James Darren to take out powerful central bank and producer selling resistance at $290. They did so and we thought the 19 year old bull market finally had began. But, every time gold poked its head above $300- WHACK. The trading patterns of both gold and silver started to look extraordinarily peculiar, unlike anything I have seen in my 25 years of watching commodity markets.

When Le Metropole opened, Midas du Metropole was a supply/demand man and was very bullish on his forecasts for the prices of gold and silver because the fundamentals looked so attractive.

The visible silver stocks continued to dwindle, the silver premiums in India were very strong as were the premiums of silver products (silver coin bags). All of this was visible evidence that silver inventories were tight.

The gold mine supply for 1998 was 2529 tonnes according to GFMS, a leading trade organization. Demand for gold for 1998 is expected to be around 4159 tonnes. That means that there is a 1600 tonne natural deficit ( demand over mine supply ) that has to be filled by gold from scrap supply, the central bank coffers, forward hedge sales from producers, or leased gold. Gold can be leased and sold into the market place ( adding supply ) due to its cheap borrowing costs ( say .75% to 1.8% ) The resulting cash from the sale of the gold is then used for a variety of investment purposes. This is similar to what was done with loans borrowed in yen.

The yen carry trade was a big winner for years. It was fostered by incredibly low interest rates in Japan. Money was borrowed in yen and then invested in, say, US Treasury instruments. Our Treasury loved it as it supported our debt instruments, keeping interest rates lower than they would have otherwise been. It also has fostered the credit bubble that is fueling the stock market bubble. As long as the yen remained flat against the dollar, or did not gain against the dollar, this trade was a windfall winner for banking proprietary trading operations and the hedge funds. When the yen rose from 146 to 111 in the late summer, the yen carry trade soured for many of the Johnny Come Lately borrowers. Now, they had to face principal losses that skyrocketing their realized borrowing costs to 20% and more. AND, some of their risk free arbitrage trades also went amuck, compounding the situation. Voila-Long Term Capital Management.

The big boys scored early and big with the yen carry trade. If it could be done with yen, why not gold? The gold loans were similar to the yen loans in borrowing costs. As long as the price of gold did not take off (so that the principal did not have to be paid back as a result of a much higher gold price and thus making the loan an expensive one), it was a winner.

In the old days, gold was only lent out to fabricators and producers by bullion dealers. That was before the golden age of go-go central bankers. Before the days when they (The Central Bank of Italy, for example) began to invest in the likes of Long Term Capital Management. But, when the word leaked out ( the Wall Street "in crowd" always gets the "leaks" ) in the winter of 1996 that the central banks were going to be dumping some of their gold holdings, the bullion dealers and hedge fund jumped into bed together. The bullion dealers made money by encouraging the producers to hedge and by lending out their bullion to willing borrowers. One fed on the other, the gold supply hitting the market ballooned, the gold price collapsed. Not only did the borrowers have money at a very low borrowing cost, they had a bonanza windfall profit because they could pay back their loans with much cheaper gold.

All has been well for those playing this game. Until NOW. The price of gold has been trading around the low $290 area for about a year and one half now. Deflationary forces have taken hold and the bears have fostered the notion that there is no reason to own gold. "Look how lousy it acts and look at its lowly price" has been the commentary dished out to the press. Behind the scenes, however, there is entirely different wordspeak going on.

Remember that deficit. It is some 1600 tonnes. That means to keep the price of gold down here, the scrap people, central banks, gold borrowers and producers have to feed 1600 hundred tonnes of gold into the market place. But, times are a changing. Many producers are not so comfortable selling gold forward at these low prices ( gold supply thus reduced ).

The pre EMU central bank selling is over for the most part. Dow Jones - Frankfurt - Jan. 7 -ECB Vice President Christian Noyer - " the national central banks ( ESCB ) will keep their gold holdings for the foreseeable future". The ECB has also made well reported statements that is has no plans to sell any of its 15% foreign exchange gold reserves in the formative stagesof the creation of the euro.

That leaves the gold borrowing crowd and gold scrap people to feed the junkie bear habit and supply heavy tonnage of gold to the market place. The gold market has little transparency. No one really knows what is what. It is very, very hard to find out what the facts are in the gold market, especially about the gold loans. The best work on this subject was done by Frank Veneroso of Veneroso Associates. As a result of yoeman, Sherlock Holmes like. Detective work, he has come to the conclusion that the gold loans have risen to 8,000 tonnes, or so. This is a big deal as gold mine supply in 1998 was only 2529 tonnes. If the shorts had, or wanted to cover, in a short period of time (like they tried to do in the yen carry trade ) there is not a chance in China that they could do so. What is worse, many of the borrowers may have, or had, no idea, until recently, how large the gold loans have grown.

The jig is up time, is here. Enter Long Term Capital Management. When this Nobel Prize winning led hedge fund blew up last fall, it was discovered that they had a big short gold position of say 300 tonnes that had been sold into the market place. Again, the proceeds were used to finance their "so called" riskless arbitrage trading positions. When the Fed and fellow financial institution big shots came in to bail them out to prevent a "systemic" financial crisis, they found out about their short gold position. What to do? A buyback of 300 tonnes, or so, in a short period of time would cause a sharp up spike in the gold price that already was moving up as a result of the serious collapse of this hedge fund. Thus, they arranged an "off market" transaction with someone, or someone's, to let them out of the trade."

From here on in, the gold game changed a bit. The gold genie was let out of the bottle. As a result of this hedge fund fiasco, financial institutions everywhere began to scrutinize their investment practices and risk taking policies. What was good for the goose was not good for the gander anymore. John Corzine, CEO of Goldman Sachs has been canned, for example. A brand new day is evolving. We know from our banking sources that "risk management reviews" are the name of the game today. That is one reason why the credit spreads have not narrowed like the fed hoped they would when they cut US interest rates 3 times in a panics late last year. Risk lending is being curtailed. There is a coming liquidity crisis coming. That will call for even greater reduction in risk taking financial activities.

Back to the ranch. What is to be done about the gold loans? The Fed and the big shot financial boys in New York had to learn about the size and potential problem of the gold loans when they discussed it with each other during their scheme to bail out Long Term. I am absolutely convinced they found out how large the gold loans were, JUST in that group alone. Good grief, they must have collectively thought. They had to come to a conclusion to try and develop and exit game plan.

Maybe the plan ( not conspiracy ) went something like this:

1. Foster the notion that gold is a dead duck for the time being. Make sure that your highly respected analyst reports project dismal future gold prices. This will encourage producers to sell rallies and help to continue to attract gold borrowers for leased gold.

Whether planned or not, the gold price projections for 1999 by this "in crowd" are very uninspiring. We know for a fact that one of these heavyweight institutions TOLD their respected analyst to come up with a bearish projection.

2. Make sure that gold is available for forward hedging purposes to the producer community.

Whether planned or not, Goldman Sachs was running around last fall offering credit terms to producers ( South African in particular ) at previously unheard of credit terms. Practically, no credit restrictions at times, at all. Just do it.

3. Defend the $300 price area at all costs for the time being. Every time, gold breaks through $300, kill it. Defend your positions and discourage gold buying as it approached $300 in the future and encourage producer hedging right below $300. We will make sure the gold is available for any of you that need it to do so. Nice to have a little help from your friends. House Banking Committee, July 24, 1998 - Alan Greenspan - "central banks stand ready to lease gold in increasing quantities should the price rise".

Now, why did Alan Greenspan utter this in the first place? Gold traded at $385 for years and that did not bother anybody. What is he trying to protect? Why mention mobilizing gold reserves when gold is trading below $300?

Whether it was planned or not, the price of gold has been bombed every time it has reached, or tried to reach, the $300 area the past 6 months.

While Midas du Metropole is shouting this from the mountain tops: " if it looks like a duck, acts like a duck, trades like a duck, it is probably a duck", we are not the only ones who are aware about the time bomb, explosive nature of the gold loan situation.

Bloomberg -Nov 26 - Sydney - " Normandy Mining Ltd. said it will realize 85 percent of the value of its forward gold sales booked over the next 10 years, giving it a profit of A$650 million. The Australian miner, one of the world's 10 largest gold miners, said it bought back 4.1 million ounces of its previously contracted gold sales, and says it replaced the sales with options. Reuters- Nov. 25 (US time)- Sydney - " The transaction will simultaneously eliminate potential bank counter party risk," Normandy said in a statement.

Why did Normandy even bring up "counter party risk"? What do they know?

The two most vociferous, and right on, pontificates of the bear case the past few years were Merrill Lynch and Union Bank of Switzerland. They encouraged their clients to go short and encouraged gold borrowing. They, more than anyone else, would have a very good idea of how large the gold loans have become. Whether planned or not, both have withdrawn from the gold derivative business. They were so right on the gold market. Why did they exit the gold derivative business? They were the bears' heroes!

Whether planned or not, 12 major banks chaired by Goldman Sachs and JP Morgan in early January formed a "Counterparty Risk Management Group" "with the intent of enhancing best practices in credit and market risk management. The policy group will develop standards for strengthened risk management practices". We realize this group was not just formed because of the gold issue, but why the need for it to be formed now? Is this not a "cabal planner" of sorts. Looks like a duck to me.

That there is a "cabal" to hold down the price of gold for a period of time really should be no surprise. They are all in cahoots together anyway- the Fed, the "plugged in" investment firms and the banks.

Bloomberg News - NEW YORK - Jan.18 - Partners at Long-Term Capital Management LP, the hedge fund that was taken over by 14 banks after losing more than $4 billion, are meeting with lenders, investors and regulators to explain their losses and pave the way for raising new money, people familiar with the fund said over the weekend…..........The partners, led by John Meriwether, a former vice chairman of Salomon Inc., have spoken to about 20 institutions in Europe and the United States and will hold similar meetings in Asia........The 14 banks, including Goldman Sachs Group LP and Merrill Lynch & Co., bought 90 percent of Long-Term Capital for $3.6 billion in September with the agreement they would keep their money in the fund for no more than three years........ The firm was taken over a little more than a month after Russia's default and devaluation in August, which caused many investors to abandon all but the safest securities and made many of Long-Term Capital's market positions unsustainable. The fund, whose net assets have climbed about 14 percent since the banks took over Sept. 28, is now run by an oversight committee of six of the banks.

Why did Terry Smeeton, a top official at Bank of England who recently retired, completely clam up about the size of the gold loans when confronted? Why did a top executive of one of these 14 banks turn red when confronted about the same issue last weekend?

We, in the gold industry, only ask for a fair shake. We ask for full disclosure, transparency of operations and some truthful answers about what is going on. So did CFTC Chairwoman Brooksley Born, who sent a letter of resignation yesterday to President Clinton, because her efforts were thwarted in this area too.







October 28, 1998

I am pleased to be asked to speak today to members of the Silver Users Association. Having represented a client in the cases and investigations relating to the 1980 manipulation of the world silver market by the Hunt brothers and others, I continue to have a special interest in the silver market.

Today, I would like to discuss recent events in the over-the-counter ("OTC") derivatives markets and to share some thoughts about the appropriate role of regulation in responding to them. The events surrounding the financial difficulties of Long-Term Capital Management L.P. ("LTCM") raise a number of important issues relating to hedge funds and to the increasing use of OTC derivatives by those funds and other institutions in the world financial markets. LTCM is a hedge fund that was able to borrow billions of dollars based on the reputation of its principals and its profitable trading. It entered into enormous positions in exchange-traded and OTC derivatives. When prices moved against it, it was on the verge of defaulting on its commitments. The Federal Reserve Bank of New York encouraged its major creditors and counterparties -- many of the largest U.S. and European banks and investment banks -- to infuse $3.6 billion into LTCM to prevent its collapse and the possible disruption of the global economy.

Most of the regulatory issues posed by the LTCM episode were raised by the Commission in its Concept Release on OTC Derivatives in May 1998, which initiated the Commission's current study of the OTC derivatives market. The issues include lack of transparency, excessive leverage, insufficient prudential controls, and the need for coordination and cooperation among international regulators.

1. Lack of Transparency

While the CFTC and the U.S. futures exchanges had full and accurate information about LTCM's exchange-traded futures positions through the CFTC's required large position reports, no federal regulator received reports from LTCM on its OTC derivatives positions. Notably, no reporting requirements are imposed on most OTC derivatives market participants. This lack of basic information about the positions held by OTC derivatives users and about the nature and extent of their exposures potentially allows OTC derivatives market participants to take positions that may threaten our regulated markets or, indeed, our economy without the knowledge of any federal regulatory authority.

Furthermore, there are no requirements that a hedge fund like LTCM provide disclosure documents to its counterparties or investors concerning its positions, exposures, or investment strategies. It appears that even LTCM's major creditors did not have a complete picture. A hedge fund's derivatives transactions have traditionally been treated as off-balance sheet transactions. Therefore, even though some hedge funds like LTCM are registered with the Commission as commodity pool operators and are required to file annual financial reports with the Commission, those reports do not fully reveal their OTC derivatives positions.


Did she resign because she was tired of talking to ducks that do not want their activities exposed? What kind of activities do they not want exposed? Is there a smoking gun here?

Yes, " Something IS Rotten in the State of Denmark" and in Washington. The people in the gold industry are paying the price for the errant ways of the financial community and what they have wrought. These ducks in Washington talk out of two sides of their mouths. They talk integrity, and practice hypocrisy and skullduggery.

The " Goon squad" and fellow ducks had better start their buy backs soon though or they will be caught up in a "Scandale Gold" of epic proportions down the road. The Asian official sector has been a big buyer of gold for reserve purposes to back a coming regional financial institution. Gold demand in India is soaring and the very high premiums in Asia indicate public demand is roaring back in that part of the world. Gold and silver coin sales are rocketing because of the coming Y2K concerns, etc. And, it is only a matter of time before one, or more, of the gold shorts break ranks for self preservation purposes.

It is also only a matter of a little time before the 19 year precious metal market ends and a substantial 5 year bull market begins. In Midas' opinion, the price of gold will reach $405 by the end of the year and the price of silver will reach $9.78. Do not wait too long Cabal, to execute the rest of your plan; the exiting of your gold short positions. Do not wait too long or you will pay dearly!

That is how Midas sees it. We only seek the truth and open to commentary from all quarters that possess insight on this matter. If our observations are not correct, we want to know why they are not. In the same vane, if you agree with Midas, send this commentary to everyone you can think of in the gold industry and to the press too. It is time to turn up the heat on the greedy gold shorts.

Midas du Metropole

Les Miserables

After graduating from Cornell University, Bill was a starting wide receiver with the Patriots of the old American Football League and has been around the financial and commodities markets ever since. He owned a futures firm in N. Y. that specialized in precious metals and was a contributor to Veneroso Associates, a global strategic investment firm and producer of the 1998 Gold Book Annual.


The periodic symbol for gold is AU which come from the Latin for gold aurum.
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